Look At 'Sticky' CPI And Tell Us If You're Still Worried About Disinflation

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By Matthew Boesler

The Carmi Times - Carmi, IL

By Matthew Boesler

Posted Dec. 26, 2013 at 11:55 AM

By Matthew Boesler

Posted Dec. 26, 2013 at 11:55 AM

One of the troubling trends that has characterized the U.S. economy over the past two years has been the steady decline in inflation rates, a phenomenon known as "disinflation."

Chart 1 shows the year-on-year percentage change in the consumer price index (CPI), as well as the year-on-year percentage change in "core" consumer prices, which strip food and energy prices out of the measurement.

What should be immediately apparent is that headline disinflation has been driven largely by falling food and energy prices, as the core reading has fallen less precipitously than the headline reading.

Yet the core inflation rate has been persistently dragged lower over the past two years as well, prompting a lot of concern about this disinflation trend in the United States.

Why is the core reading following a similar pattern as the headline reading? It must necessarily be indicative of falling prices in other CPI components that are not food and energy.

Research from the Cleveland Fed and related data measurements tracked on a monthly basis by the Atlanta Fed can help answer this question.

Naturally, the flexible CPI series is much more volatile, as goods-producers can adjust these prices much more frequently. And it shows some of the big contributors to disinflation in core consumer prices: vehicles, apparel, and travel lodging are all components of flexible CPI that are also included in core CPI, as they are not food and energy items.

Chart 2 shows the flexible CPI series, as well as a "core" version of the flexible CPI that strips out food and energy components — leaving behind basically only the vehicles, apparel, and travel lodging items mentioned above.

When compared to sticky CPI, it should be plain that food and energy — and to a lesser extent, these other components of flexible CPI like vehicles, apparel, and travel lodging — are the primary drivers of the current disinflation trend observed in the United States.

Sticky CPI, on the other hand, has based in the second half of 2013, and may be poised to turn up, as Chart 3 illustrates.

Sticky CPI, according to the Cleveland Fed's Bryan and Meyer, is a better predictor of future inflation trends, because of the naturally embedded inflation expectations reflected in the series — if producers of these goods cannot change prices as frequently, they will set prices with an eye toward where they believe inflation will be in the future.

Page 2 of 2 - Look at where sticky CPI has based: at 1.9%, just a tenth of a percentage point away from the Federal Reserve's 2.0% target.

Is disinflation something the Fed should still be worried about? We're not so sure.